much for standing by. It's a great pleasure to have with us the management of Tube Investments of India Limited for discussing Q2 FY 2020 earnings. From the management side, we are represented by Mr. Vellayan, who's the Managing Director, and Mr. Mahendra Kumar, who's the CFO. I will now hand over the call to Mr. Vellayan. Mr. Vellayan, over to you, sir, and a big congrats for a good set of numbers.
Thanks, Kashyap. Thanks a lot, and thanks for hosting the call again. Good morning, everybody. Basically, the board met yesterday, and we've approved the financial results for the quarter ended 30th September. The overall revenue is down. We've had a drop of 18% over the same quarter last year, and that's mainly driven by the growth in the auto industry. The good news is that our PBT is up at INR 111 crores, which is a growth of 31% over the same quarter last year. Our PAT, obviously because we benefit significantly from the reduction in tax rate, goes up by almost 58%. Our return on capital employed has also improved. We've gone to 22% in the first half. Our free cash flow is at INR 154 crores, which is at 86% to PAT on an accumulated basis.
One of the things we're also doing is opting for the lower tax rate of 22% and recognizing the resultant benefit over three quarters. This being the first quarter and then the current and the next quarter as well. The PAT for the overall business was at INR 90 crores as against INR 57 crores in the same quarter last year. I'll get into each of our individual businesses. Engineering business revenue was at INR 554 crores compared to INR 772 crores last year. PBIT for that business was at INR 63 as against INR 65 crores. The ROCE for this division is at 36%, which is slightly lower than the 37% we had last year. Cycles and accessories, we basically had a revenue drop of 31%. One of the reasons is because we're also going slow on the institutional business.
Our PBIT here was at INR 6 crores as against INR 5 crores in the corresponding quarter of the previous year. Here I must really compliment the cycles team because in a tough market, and without much revenue from the institutional business, we've still done a lot on the efficiency front to improve our performance there. ROCE for the division was at 21% compared to 10% last year for the first half. On Metalform products, our revenue was at INR 379 crores compared to INR 336 in the same quarter last year, a growth of 13%. PBIT was at INR 40 versus INR 31. Growth has come from railways, industrial chains, and Fine Blanking, and that has helped offset some of the de-growth in auto. ROCE for this division at 32% compared to 27%.
On a consolidated basis, our revenue was at INR 1,247, and our PAT was at INR 93 crores as against INR 67 crores. Shanthi Gears, which is a subsidiary, had revenues of INR 71 crores as against INR 59, and that's a growth of 19%. PBT there for the quarter was INR 12 as against INR 11 in the same quarter last year. Overall, I think we continue to be very optimistic about the future at TI. I just think that we just see there's a lot of opportunity whichever way the market goes over the next year and next couple of years. I'll just stop with that commentary and be happy to answer any questions that you all may have. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question, you may press star and one on your touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. A reminder, you may press star and one to ask a question. The first question is from the line of Sagar Parekh from Deep Finance. Please go ahead.
Yeah, good morning, sir. Congratulations for excellent set of numbers.
Thank you.
Hello? Yeah.
Thank you.
My first question is on the gross margins. For this quarter, we saw one of the highest gross margins of 40.5%. We have highlighted in the past about new different sourcing strategies which will help our gross margins. Just wanted to get your sense that from now onwards, do you think these gross margins are sustainable, or is there a further improvement which is possible?
Yeah, at the gross margin level, I think these are about the right numbers. Obviously, what will continue to change is the overall mix of the business over time.
Okay.
That might help us. In some of the existing businesses, I think that this is a good set of numbers to work with. Though I do think that overall for PBT improvement, there's still quite a bit of headroom for growth. At the gross margin level, I do think that for existing businesses, they should stay about the same.
The lower realization in terms of steel prices going down would have also helped, right, in the last couple of quarters? Assuming steel prices go up, is there a chance that gross margins will fall or you think that it can be passed on?
Yeah, to an extent. For us, it's kind of significantly moderated by the fact that a lot of our deal is just a pass-through.
Okay.
We have to adjust for prices up or prices down.
Okay.
To an extent, you're correct, but for the most part, I would say that doesn't affect us as much.
Okay, got it. On the exports front, we have highlighted in the past that a lot of focus is there on the exports. Firstly, what was the export growth number for H1 and Q2, and how much does it contribute in the total mix?
Yeah, actually, exports have been flat. Part of what we've seen is also that in the existing segments that we're in, we've also seen a degrowth in terms of the export market.
Okay.
That's part of the challenge we've had. For the year, exports have been flat versus last year.
How much does it contribute?
Overall, it's about.
8%-9%.
8 to 9% of that.
Sorry, 8%-9%?
That's right.
Okay. On the cycle divisions, you highlighted that there's still headroom for margin expansion from the current levels also. Where do you see the sustainable margins going forward? Where do you see the demand picking up over there, or do you think that these kind of numbers will continue for the next at least couple of quarters?
I've always said that I'm not a good predictor of whether demand is going to pick up or not, right?
Right.
Our focus is to be ready for the situation where demand picks up. Our focus is to also be able to deliver profits and bottom line if demand does not pick up. Right? From that perspective, what we're doing is a lot of belt-tightening and also improving a lot. We've restructured our entire logistics infrastructure in the country to streamline it for the new environment. A lot of the efficiency changes that we started making have started yielding results. We've also done a lot of work on network working capital, bringing some of our inventories down and making that more efficient as well. Both from a cash flow perspective and from a overall PBT perspective, some of the actions that we've taken have started yielding fruit.
The team there is also significantly focused on more opportunities. We definitely see more of that coming in the next coming year as well. We're actually very bullish about improving margins in that business.
About 4%-5% that we have mentioned in the past looks like it will come soon then?
That's correct.
Fair enough. What is our net debt number as on September?
298.
298.
298, sir.
Okay, we have repaid about INR 80 odd crores, I think.
Compared to beginning of the year, we are down by about almost INR 350 crores.
Okay. Okay, great, sir. That's it from my side, and wish you all the best.
Thank you.
Thank you very much. Anyone who wishes to ask a question, you may press star and one. Next question is from the line of Kiran Karthik from Table Tree Investments. Please go ahead.
Hi. Good morning. Congratulations on good set of numbers, sir. Sir, you've stopped elaborating on Shanthi Gears' order numbers. If you could just tell us what's happening in the business, order book numbers, and you've had deals in business as well. If you could just elaborate on that?
Shanthi Gears is basically, like you said, we don't give any specific commentary on that. The business continues to be strong. I would definitely say that industrials are seeing some pressure because of the overall environment as well. I think overall, we continue to be fairly strong and fairly bullish about that business going forward.
Got it, sir. Any particular order book numbers, sir? Because last year we had about INR 200 crore order book in second quarter FY 2019.
Yeah
that the management declared. Are we around the same number? Have you increased it?
Again, I think you asked that question. I said we don't specifically discuss the order book numbers anymore.
Okay. Sir, I'll probably ask a revenue question then. We are getting to an INR 70 crore quarterly run rate from an INR 60 crore quarterly run rate. Do we think INR 70 crore revenue quarterly run rate is a decently sustainable number in your view?
Yes, we do.
Okay.
Obviously, some of this depends on the environment, right? Like I said, it is a tough environment even for that business. I don't want to predict when the thing will pick up. In general, is that doable? Yes.
Got it. Thank you, sir. Sorry, sir, last question, if you can squeeze in. The gross margins have kind of reduced. Is it the general demand slowdown and therefore we are taking some price pressures, sir?
Yeah. Basically, that is right. That is correct. Your statement is accurate.
Okay, great, sir. Thank you so much.
Thank you.
Thank you. Next question is from the line of Yash Agarwal from GM Financial Limited. Please go ahead.
Good morning, sir. Congrats on the good set of numbers.
Yeah. Thanks, Yash.
Yeah. I had a question on the engineering division. It's pulled down sharply this quarter, about a 28%-29% revenue decline. Is this more of a function of the decline in production in the auto? What's the outlook here, as in it should get better, right, from here?
Yeah. Yes. Like I said, I mean part of the challenge is we don't have a crystal ball, kind of are able to predict when the market's going to look up. What we continue to remain confident on is that we're using this cycle in order to focus on all of the things that we started articulating last year. It's actually a great opportunity for us to focus on quality improvement, on productivity, on moving more to Toyota Production System, on looking at our logistics, looking at power, and it just gives us a lot more time to do that. To your specific question on, do I think second half's going to be better than first half, all of these things, I think it's a coin flip. Honestly, I don't think anybody knows right now.
I don't want to really speculate on that because I'm not going to give you the right answer. All I'll say is my answer has a 50% chance of being correct, right?
Right. Sir, exports seem to have again disappointed in the second quarter. I think it was doing all right.
Yes
in the first quarter.
Yeah, exports, definitely there was a slowdown, particularly Europe and EU has slowed down significantly, and we saw significant inventory buildups in the EU across most categories that we export. What we have to now see is how to bring that back. Our belief is that the EU inventory situation is correcting. Their year basically ends in December, and what most people tend to do is then stock up for next year. I would say that's encouraging from that perspective, is driven by a slowdown in the EU.
Sure. On margins, you spoke about a 10% PBT in the next two years. I think H1, we're already there. Would you like to revise that now?
Yeah, I just think that, obviously first is to sustain it and lock into this. That's the first objective. Obviously, yes. If we are able to stick at this number for a year, we will revise it up.
Sure.
Okay. If you're asking for a target and by when, I would say, we'll set the next target at 12%.
Sure. A few more questions, sir. The other expenses, they're down about 20% year-over-year. How much is it a function of a decline in top line and how much is actual cost cutting, as in, the non-required cost cutting? How much would you attribute the split, the decline in our expenses to?
Yeah. Anshul.
Yeah. A large part of it is volume-driven, but there are also efficiencies which came in. I would say out of the decline, maybe around 20%-25% is related to efficiencies.
Sure. Okay. Lastly, on the new products, I think you had highlighted three or four products, all vision products, truck body, et cetera.
Are you some sense how significant can these three, four products be for you? Some color on these new products?
Yeah. I mentioned this multiple times every time I articulate them, which is, the way you have to look at these products is more driven by like you would view startups. You don't start measuring these products on the same metrics as others. Like I've openly said, we're going to do 10 of these over three years, then only four of them are going to succeed. The way I look at it is, we continue to be very bullish about the three that we've announced. To us right now, the metric is not revenues, but do we feel like the actual opportunity is real? We continue to believe that the opportunity is real in those three businesses.
Got it. Finally, sir.
Sorry to cut you, Mr. Agrawal. I'll have to ask you to.
Sure. Okay.
Thank you. Anyone who wishes to ask question, you may press star and one. Next question is from the line of Abhishek Ghosh from DSP Mutual Fund. Please go ahead.
Yeah, thanks. Could you help us why the other income is higher in the current quarter? Is it related with the yield or is there anything else there?
There was one final dividend from SGL, which was declared before or after Q4, so that has been received in Q2.
Okay. About INR 7-8 crores would be attributable to that?
Yeah, about INR 6 crores.
Okay, thanks. We see a sharp decline in payables in first half of FY 2020. Is that also somewhere that we've been able to get better pricing as far as raw material procurement is concerned on account of that? How should one look at that?
Well, I would say that part of it is also that we're basically buying less because we've been working with our inventory situation also a fair bit.
Yes.
That's also driven by the fact that we're just buying less right now on a lot of our businesses.
Okay. You've cut down on inventory as well as the payables part of it, both is what you're saying, effectively?
That's right.
Sir, if you can just help us understand that, given whatever slowdown that we have seen in the auto segment, how was your pricing with the OEM kind of setting across? We have also seen a reduction in raw material, but there's a sharp slowdown in the auto demand, which is effectively turning into a lot of discounts. How is your pricing on a product basis panning out with them?
besides of the steel pass-through.
I would say in most situations, we've been able to hold.
Okay.
I think what we're beginning to see is very interesting in the industry, which is we're beginning to see players who have weak balance sheets get a bit more desperate in the space. Right?
That's causing them to basically try and grab more business through discounting and all that. What we only see right now, from what we can tell from the outside, is their balance sheets continue to deteriorate.
Actually, that's why I think that if this environment continues for a long time, I wouldn't be surprised if you kind of begin to see some kind of, because of that weakening, right, kind of the number, the supplier base, I don't know. I would think that some kind of exits would have to happen because of that, right? Obviously, we can't speculate on what others are doing.
Okay. What you're essentially saying is, as of now, whatever impact you've seen in the raw material prices, the same amount has been passed on, but nothing beyond that, at least as we speak.
There is always a little pressure, but we've not passed on too much beyond that.
Okay. Have you been able to firm up as far as what is the CapEx that you'll incur? Because in the cash flow statement that you have given out, I don't know if that's the correct number, the CapEx seems to be about INR 106 odd crores. What is the exact CapEx that you've incurred in the first half? Likely 20 CapEx.
196.
INR 96 crores is what we spent in the first half. Yeah.
Okay. For the year, what is the number looking like?
About INR 200 crores.
That is about INR 200 odd crores. Okay. Okay, sir. Thank you so much for answering my questions and all the best.
Thank you.
Thank you very much. Next question is from the line of Arun from Capital Markets. Please go ahead.
Yeah. Thanks for the opportunity. Good morning. I have a couple of questions on Shanthi Gears. Looking at the half-yearly numbers of last three fiscal of Shanthi Gears, the H2 operating margin is lower than H1. By more than 200 basis points. Any specific reason for this trend, sir?
Yes, I think first off, my general thoughts would be that we keep this focused on TI. Obviously, Shanthi Gears has its own investor communication, and we do that as well. I would prefer that. Sorry, what is your question again?
Yeah. The H1 margin for the last three years is, H2 margin is more than 200 basis points lower than H1 margin in the last three fiscal. Any specific reason for this kind of trend, the change in trend? Will this trend continue going forward?
No, I don't have the answer to that question off the record. We can look into it, but I don't have the answer to that.
Comparing H2 with H1.
Yeah. This trend is happening only for the last three fiscal years.
Yeah. No, we don't have the answer to that question.
Any business change mix or something like that?
No. Like I said, sir, we don't have the answer to that question.
Okay. Another one on the Shanthi Gears itself. How is the order visibility? Where you are seeing the traction in orders for the Shanthi Gears?
Somebody earlier just asked a question on order book, and like we said, we're not sharing the order book data anymore because we don't think that it's the best reflection of what is happening in the business.
Okay. Otherwise, you can show what is the service income for the H1 for Shanthi Gears?
Again, we don't show segmental income at that level. Basically, the service income is up significantly.
Okay. Thanks a lot, sir.
Thank you.
Thank you very much. The next question is from the line of Srimant Dodia from Unifi Capital. Please go ahead.
Good morning. Thanks for the opportunity. Firstly, in the metals division, you had highlighted the railways industrial chain and Fine Blanking have done quite well. If you could please highlight what kind of growth we have seen in these three areas and the contribution from these three segments to our revenues.
On an average across those three segments, I think we would have seen close to about a 40% plus growth. Second, in terms of contribution, they tend to be our higher contribution segments as well. They're higher than the average for Metal Form.
Based on your current order book and the visibility that you have in these areas, do you think that these kind of growth rates are sustainable in the near term?
Yes, we do believe that at least in a couple of those businesses, we will continue to have high growth rates.
You had highlighted about the gross margin in responding to the earlier question. Below the gross margins, if you could please highlight what further initiatives are there in the pipeline which could lead to further reduction in our operating cost?
Like I said, basically first is just on quality. We started off this movement to go to TQM, and we're about one year into that journey. It's a five-year journey, and our belief is that five-year journey will result in at least kind of a 2.5% improvement in PBT to sales. Right? The second is on productivity, and that links to IoT, where we basically connecting all of our equipment across all of our plants. That, we believe, again, is going to result in significant gains. Where we started looking at some of the data, we've already seen close to 20%+ in gains in productivity. We think that at least another 15%-20% exists across that ecosystem. That's a huge area of opportunity for us. I would say that there's significant work to be done on that area as well.
The third effort that we have is on Toyota Production System, where we've begun to implement that in some of our operations, and we will continue to roll that out across our entire system. What that does is work first off on just overall inventory levels, and it also obviously helps on the quality and productivity side as well. It also helps us significantly improve our mix and our alignment with end customer requirements. The Toyota Production System initiative also is about, I'd say, nine to 10 months. That again, is going to be a three-year-plus initiative, and every year it'll give us gains not just on the inventory and the working capital side, but also on the productivity and quality side as well.
The fourth is what we started to do with freight and logistics, where we've begun to get some gains in, but I still think that there's significant gains to be had. We started looking at our warehouse infrastructure and seeing what the optimal warehouse infrastructure is required across the country. There's a lot of work on getting backhaul and reverse loads, and getting better price efficiency across our entire network, given our size and buy, which is close to INR 300 crore in spend across our system. We see significant opportunity there that we'll continue to get. Powering continues to be a very strong area for us, where we think that there's significant value to be had on that. We're putting rooftop solar across all of our facilities. That gets us a significant gain. Looking at basically how we reduce the overall cost per unit across our system.
Basically just start looking at, even from just an overall fixed cost structure, why do we run processes the way we do? We're looking at what we can do. A lot of simplification internally to reduce bureaucracy levels and make decision-making much more efficient. There's significant headroom in that and still a lot of opportunity to come from those areas over the next three years.
Back in the queue. All the best.
Thank you.
Thank you very much. Anyone who wishes to ask a question, you may press star and one. Next question is from the line of Lakshmi Narayan from TN Capital Advisors. Please go ahead.
Yeah. Thanks. A few questions. First is pertaining to the tax rate reduction. In course the tax rate reduction, some of the OEMs have said that they would actually pass on the benefits. As a supplier, are you being asked to part away some of your benefits which you get from the tax? I mean, how is it looking? The second question is related to the cycles and accessories. If I look at the 6 months, there has been a dip in the revenues. At a segmental level, the margins have been quite good. The third question is pertaining to Shanthi Gears. Just want to know what % of revenues comes from customized gears, and what is the exports plan for Shanthi Gears? These are my three questions.
Okay. Sorry, I missed what the question was on cycles specifically.
Cycles and accessories, if I look at on a six-month basis, I see the revenues have come down. The margins at an absolute level has been quite steady in comparison to revenue dip. I just want to understand the dynamics of it. Is it because of institutional mix or what? That's my question regarding cycles.
To your question on whether there's pricing pressure, I always think there's pricing pressure from the OEMs. I mean, the OEMs are very strong players in the country. Basically always are, and are very kind of intelligent and astute players in this country. I think it's a natural kind of tension that always has to exist, that there will be a desire to reduce price. The bigger thing that we continue to offer to differentiate is just a very high level of quality in all of our products. We continue to believe that if we can just stay very focused on quality, we can manage a slight price premium over our competition. Right? That's something that we continue to focus on, which is why we continue to maintain that focus on quality.
We are investing significantly on getting better quality across our system. To your second question on cycles, yes, we did significantly reduce our institutional business. The gains in margins and cycles have come purely from efficiency. The team has put in a lot of effort to basically streamline costs across the entire mix, to basically get us just much better efficiencies and throughput in that business. That's what's beginning to yield fruits. Like I answered earlier, we also think there's more headroom for growth in that business, in terms of both margin expansion and then that therefore kind of also leading to potentially a share growth over time. Your third question was on Shanthi, and what was the Shanthi question?
Customized gears.
Yeah, customized. In terms of non-standard versus standard, basically Shanthi is much more of a custom job. I would say almost 60%-70% of our revenues comes from custom gearboxes and gears. That's in terms of that number.
exports of Shanthi Gears?
Exports is fairly small at this stage. It's, I think, about 4%. Yeah. 3%-4%, but that is a focus area for us, so we hope to start picking it up over time.
Okay. Thank you so much.
Yes. Thank you.
Thank you very much. Next question is from the line of Shyam Sundar from Sundaram Mutual Fund. Please go ahead.
Yeah. Hi, sir. Good morning, and congratulations on very good operating performance, sir.
Thank you, Shyam.
Yeah. Sir, just on the metal forming side, you did mention the industrial chains have done really well. Whereas, the commentary we hear from some of the large bearing manufacturers on the industrial side seem to indicate that there's a slowdown there. How would you look at the industrial segment for the chains business going forward?
Yeah, I'd say that we are very bullish about that segment. I think there's a lot of opportunity, both domestically and export. We're beginning to scratch the surface on export, but we think that there's a lot of expansion to come on the export side in that business. Domestically, we have a pretty good market share. We have almost, I think, a significant market share in that business. What we see in that business is that the number of new applications that are coming out is increasing quite significantly, and that gives us a lot of reason to be optimistic about growth on the domestic side as well.
Okay. In a sense, it is market share gains that is bringing us growth. Is that a fair assumption? New applications.
New markets.
New markets. Okay, within the domestic as well, leaving the export side as export-based side.
That is correct.
Understood, sir. On the railway side, sir, if you can talk of new initiatives, what is driving the strong growth here? Is it because of some gain in share from the weaker players, or is it some structural shift happening to LHB coaches that is leading to this kind of good momentum on the railway side?
Shyam, there's a lot of pickup in demand from railways. I think we're very bullish, and the government also is very bullish on how much they're going to focus on improving the whole railway system. I think the minister there has been very proactive and very encouraging of growth. We are very optimistic, and that optimism is reflected across all of the railway facilities. What we have done is move beyond just ICF here in Avadi to all the different locations, MCF, RCF, all of them. That's one side of it. The second is we started getting export volume, and the third part to that is that we've also started doing work with the metro guys. Right? Metros is also included in the railway business for us.
Okay.
Metros are both domestic and export, by the way.
Understood, sir. Here we do the panels and all that, right? For the coaches.
Yeah, we're looking at additional components as well. Yes, the panels is our mainstay product.
Understood, sir. Just one more thing. On the aftermarket side, how is the aftermarket behaving specifically on the auto side of the chains business, if you have to look at it?
We're definitely growing significantly there. We see a lot of opportunity to continue that growth. There is a certain amount of aggression overall on pricing. The good thing for us is that because we didn't have huge geographic spread, just improving our geographic spread itself is getting us growth in that business. More than that, the team has been putting in a lot of work to look at new products that are specifically catering to the aftermarket, significantly value-adding in the aftermarket segment. Again, that's a segment that I'm very encouraged by, and I think it'll continue to grow for us because that's something that we're focusing heavily on today.
Okay. The underlying market is also pretty okay, sir, because we hear of some liquidity challenges with the dealers, but you're not seeing that kind of pressure there, is it?
Yeah. Honestly, there is a bit of liquidity challenge, it's something that we have to manage through, right? We have a multi-layer distribution infrastructure, and we're very careful about how we manage that. Is there pressure in our SMEs facing working capital problems? Absolutely. There's no doubt about that.
Okay. Understood, sir. Just one last thing. On the working capital side, the question was asked before, specifically on the trade payables. Just want to confirm, is there any change in terms of trade there, in terms of the trade payables per se?
No, there's nothing. There's no specific change.
Okay. Thank you, sir. That's it from my side.
Thanks, Shyam.
Thank you very much. Anyone who wishes to ask a question, you may press star and one. From the line of Kashyap Pujara from Axis Capital Limited, please go ahead.
Yeah. Mr. Vellayan, just a couple of questions. Firstly, while you have guided earlier the strategic intent to be at 10% PBT, sustainably, we are already there, and seems that there is still a lot of steam left in terms of further cost reduction initiatives and also cycle margins, which are still to go to the sustainable 5% mark. At this point, will you up this trajectory, and can our business potentially be at a point where PBT margins can be in the 12%, 15% kind of a range over a 3-5-year period?
Kashyap, absolutely. Can we get there over a three to five-year period? Absolutely. Like I said before, let us deliver 10% over a sustainable timeframe. After that, yes, will we push for 12, 15%? There's no doubt. We are looking constantly at mix, what we can do to improve. Between mix and efficiency, yes, we will definitely get there.
Sure. The net debt is already now maybe at working capital levels or slightly below. Would our intent be to kind of continue till we get any opportunity to grow inorganic or adjacency? Would it be fair to assume that we'll actually get to a zero debt position by the end of this year or next year?
Yeah, I'd say zero debt by the end of this year is aggressive.
Yeah.
You're right in terms of how we're looking at it, which is we'll continue to invest the capital that's required for growth into the existing businesses. We will continue to invest in new businesses that require that capital for growth. With both those sets of investments, we continue to believe that we can reduce our debt position over time. Right? That does mean that if we do not get into any kind of inorganic situations, we will move to a situation where we are zero net debt or even kind of positive in terms of cash. To your question on inorganic, it's something that we will continue to look at, but we're not going to look at any full price kind of acquisitions in the market. We will just continue to be opportunistic and kind of see what presents itself.
We're going to be very patient from that perspective versus look at doing anything in a hurry.
Sure. In the first call, you laid out your strategic intent that 10% PBT, close to 30% intent of return on capital, 80% path to free cash flow, and over a four to five-year period, the thought process was that we should be close to INR 10,000 crores in terms of revenue. Maybe 16%-17% compounding as far as revenue. Most of the parameters are going as per plan, besides the revenue, which I understand is not in your hands.
Right.
You still maintain that you don't crystal gaze, which is fair. Could you give an update on some new adjacencies and how they are progressing, like the TMT bar initiative that you had spoken about. You had also said that there is something about the vision side. There were three, four initiatives you had kind of alluded to in the previous call. If you can just explain what's the outlook on some of those segments.
Yeah. Kashyap, I think I answered this earlier in the question sequence. The point, like I said before, is that the way you have to look at these are like startups, right? You don't measure them with the same set of metrics that you measure existing companies. The way we look at them is that we seed them. We've said that over time, we believe that we're going to see 10 initiatives and four of them are going to be successful. The way these work is that the four that are successful will be successful enough that they will basically give us that 6%-7% gap in growth that we look to fill with new businesses. Given that, we continue to be bullish about the three that we have started. Well, two are started and one, the factory is still getting built.
That one, for lens, the factory will be ready at the end, we're hoping to get production in that March timeframe next year. Get started with production in terms of March or April, so the end of this financial year. We continue to be very bullish about the opportunity in those spaces as well. Right? I think from our perspective, we are quite encouraged by what we see there. We're also encouraged by adjacencies in our existing businesses that we continue to focus on and leverage for more business growth.
Sure. Okay, sir. Wish you all the best.
Yeah. Thanks, Kashyap.
Yeah.
Thank you very much. Next question is from the line of Trupti Agrawal from White Oak Capital Management. Please go ahead.
Yeah. Thank you for this opportunity. Excellent set of results, sir.
Thank you.
Sir, I just need a small clarification. Since you talk about PBT margin, guidance has been 10% of PBT margin. I just want this clarification that, when you got a lower top line, a PBT margin of 10% is achievable much faster because of the denominator effect. Is that understanding fair? What I just want to understand is, in terms of your own business plan, the absolute numbers that you must have targeted for EBITDA cash flow generation, are those met? The PBT margin could look higher because of a lower denominator. Just, I hope you've got my question.
Yeah. I think that's a great point. Like I answered to a couple of earlier questions as well, that's why I said, the important thing for us is to sustain this margin over time. Internally also, we look at it and say, "Listen, how can we sustain this margin over time?" You are right. To a certain extent, yes, you are right in terms of that behavior does exhibit. That's why also we constantly keep taking a look at our free cash flows and return on capital employed, because it's important. The more important thing that I look at is if free cash flow and PBT are moving in the same direction or not.
Sure.
It would worry me if they were not. Your point is a good point, very well-made point, and that is why I continue to emphasize that give us time to actually lock into this number over a sustained period. You have to be able to show the same number in a down cycle and an up cycle before you can actually believe that the number is locked into.
Sure. Got it, sir. Thank you so much, sir. It's extremely inspiring to see and hear about things like IoT and all in a company like yours. I think it's exceptional. Thank you.
Yeah. Thanks so much, Trupti.
Thank you very much. Next question is from the line of Srimant Dodia from Unifi Capital. Please go ahead.
Yes, sir. Thanks again, sir. You talked about newer applications of the industrial chain. Can you briefly highlight what areas are we supplying in these new applications? Just to understand, are we replacing some existing vendors there or is it some new products that are getting developed?
Domestic and export varies a lot. Export, there are all kinds of complex applications that Indian chain manufacturers have traditionally not been in, and we've started getting into those applications. Basically, they are in the space of what are called adapted chains, which means that you have a basic chain functionality, but then you add more functionality onto it by adapting the chain with different attachments onto it. That is a space that is offering us tremendous growth outside of India, so we will continue to develop innovative products and push it out into global markets from that perspective. In the domestic markets, there are different kinds of products. One product, for example, continues to pick up a lot are parking garages. I don't know if you've seen this multi-layer parking.
I don't know if you are from Mumbai, but Mumbai and places that have no space at all, more and more people are beginning to go vertical. These multi-layer parking structures basically require industrial chains as well, and so we have good products that meet demand for things like that. Products like that are continuing to grow. Agricultural applications in this country continue to grow, with rotovators, seed drills. Applications in the agricultural area continue to grow as well. Those are both good segments for us, and domestically, we're seeing many segments there. The third segment that's growing significantly is food processing, and the food processing segment requires significant industrial chain applications as well. Hello?
Hello. Can you hear me, sir?
Yeah, I can hear you now.
Secondly, on the Fine Blanking division, what is driving the growth there? Has there been a new customer addition which is leading to the growth in that division?
Our existing customers are growing with us. The second thing with that division is that almost 40% of revenue comes from new products that were introduced in the last 12 to 18 months. What happens with these products is that they have their own growth cycle, because you usually start off with smaller volumes, and then they start scaling after that. Fine Blanking is a segment where we're investing heavily in new product development. Happening is you go through your entire PPAP and approval process with clients, and then those products begin to scale. It's not one product, but several products in that area. We also have some stronger customer relationships that continue to grow significantly for us, and those are making products for the export market. We supply into them, and then they make the final product and export it.
These are global majors, and they continue to scale well with us as well.
Contribution of the aftermarket division, sir, in the H1?
You're talking about aftermarket chain?
No, for the overall business. The aftermarket, what was the contribution from that?
Yeah, we don't discuss aftermarket numbers in specific. Honestly, outside of chains, we don't have huge aftermarket businesses. That's all embedded in the chain numbers.
Thank you so much, and all the best.
Thank you.
Thank you very much. Next question is from line of Govindraj Ethiraj, an individual investor. Please go ahead.
Sir, good morning, sir. Hello. Congrats for the fine set of results, sir.
Sir, I want to know about, I have been often seeing many advertisements about the TI Macho TMT bars in regional newspapers. What sort of arrangements it is, sir? Whether we are manufacturing out of it or it is only a marketing tie-up, sir?
Not a marketing tie-up. Basically, we focus on quality, on brand, and the marketing for that.
Okay, sir.
We have significant inputs into quality and the whole production aspect as well.
Okay. That revenue will not flow into our account, sir?
No, we don't recognize the full revenue on the product in our account.
Okay, sir. What is the volume of take in the last three months, sir?
Yeah, we don't discuss numbers for any of the new businesses.
Okay, sir.
This is Raj. I want to ask you-
Hello
for a follow-up question.
Yeah.
Thank you. Next question is from the line of Shyam Sundar from Sundaram Mutual Fund. Please go ahead.
Hi. Thanks for the opportunity again, sir. On the export front, you did allude to the high inventory buildup that had happened earlier and which is now sort of destocking. Are we seeing any order cancellations there, or is it more of a function of a weak passenger vehicle market in Europe? How would you allude to it? We have always spoken of exports as being a very strong growth engine for us. If you can give some color on what is happening on that front, that'll be helpful.
Yeah. Basically, what we are doing in that export market, Shyam, is that we've developed three or four new products that are basically traditionally not They have not been where most of our revenues have come from. Those products, especially on the OEM side, have to go through their own approval cycles before they can start picking up significantly. That will be kind of a slow ramp, and then once a pickup happens, that will help us tremendously. You are right. Weakening domestic demand in Europe is what caused the slowdown. Like I said, there was overstocking by the distributors. Basically, about half our export business is distributor, half is OEM. The distributor and dealer side of that business had ended up overstocking, and so they were cutting back on inventories.
Basically what ends up happening is then they start stocking up for the new year. For them, the new year begins in January. We'll start to see some of that begin to exhibit. That's basically what caused the slowdown for us.
Okay. Understood, sir. This is largely on the tube side, right? Engineered tubes.
Yes. We also do industrial chains. Those are our two biggest businesses. I'd say, yeah, those are our two biggest export businesses.
Understood, sir. On the CapEx front, we have guided for about INR 200 crores CapEx for the full year. Broadly, what are the areas where we are looking to add capacity? We've also cut CapEx from last quarter, we had guided for about INR 250 crores-INR 290 crores of CapEx for the year. From there, we have cut now to INR 200 crores. Broadly, what are some areas that we are looking to add capacity, sir?
The three biggest areas, obviously tubes and engineering continues to be a very big area for us. The second is the railways area where we're investing significantly. The third will be we continue to have strong relationships with some of our, like in our auto business, in our Metal Form auto business, we see a lot of opportunity there as well. That's a business that we're continuing to invest in.
Oh, okay. Metal formed auto, when you mean, that is on the door panels that we do for the-
That's right.
Okay. Understood, sir. Sir, one last housekeeping question, if I may. The unallocable capital employed is about INR 800 crore this quarter. That has gone up from about INR 700 crore levels. If you can help us understand what is there in that will be helpful.
Sir, it mainly comprises of the surplus funds which we have, which we have invested in mutual funds.
Okay.
Basically, we are holding on to debt on NCDs that we basically can't close out.
Okay.
To offset that, we've invested in mutual funds to tie that. We can kind of pay down the NCD though.
Okay. Got it, sir. Thank you very much, sir.
Thank you.
Thanks.
Next question is from the line of Sudeep Jain from ASK Investment Managers. Please go ahead.
Sir, specifically for the engineering division.
Sorry to cut you off, Mr. Jain.
We cannot hear you.
Can you speak a bit louder?
Is this good enough now?
No, sir.
No.
Is it good now?
Hello.
Hello. Mr. Jain?
Still very feeble.
Yeah, Sudeep, you can try, but it's still very, very feeble.
Is it good now?
Yeah. It's good.
Yeah. Specifically for the engineering division. Your top line came up by 28%, margins went to 11.4%. These are the highest margins if I look at quarterly data since March 2011. Even during that quarter, March 2011, actually the top line went up by 37.38%. What explains this kind of performance, and is it sustainable?
Yeah. I think a couple of times this question was asked. I do agree with the point that Trupti brought up, which is a down cycle does tend to have some of these effects where you basically start looking at it as a percentage basis and goes high. I do think that in the engineering business, margins will moderate from that level to slightly lower levels, if you think of an average over the cycle.
Sure. Thanks.
Yeah. Thank you.
Thank you very much. I now hand the conference over to Mr. Kashyap Pujara. Please go ahead.
We don't have any further questions, so thank you everyone for getting on the call to understand Tube Investments, and thank you, Mr. Vellayan and Mr. Mahendra Kumar, to answer all the questions patiently. Wishing you all the best for the remaining part of the year.